Working at an organization that offers a pension plan is one of the greatest financial advantages a Canadian can enjoy. Pension plans are designed to provide retirement income and help employees reach their retirement goals and for business owners- help retain key employees.

Pension plans can offer:

  • Employer contributions
  • Forced retirement savings for employee

There are 2 main types of pension plan:

  • Defined Benefit Plan
  • Defined Contribution Plan

Defined Benefit Plan

  • Retirement income is guaranteed, contributions are not.
  • The pension amount is based on a formula that includes the employee’s earnings and years of service with the employer
  • Usually, contributions are made by the employee and employer
  • The employer is responsible for investing the contributions to ensure there’s enough money to pay the future pensions for all plan members.
  • If there’s a shortfall, the employer pays the difference.

Defined Contribution Plan

  • Contributions are guaranteed, retirement income is not.
  • Usually, contributions are made by the employee and employer.
  • The employee is responsible for investing all contributions.
  • The amount available in retirement depends on how the investment performs including total contributions.
  • At retirement, the money in the account can be used to generate retirement income through purchasing an annuity or transferring the amount to a locked-in retirement income fund.

In summary, a defined benefits plan guarantees you a retirement income and a defined contribution plan guarantees contributions but not retirement income.

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